Live Oak Bancshares Inc. is looking to build a national brand with its varied technology investments and a new CFO poached from a regional bank.

BJ Losch started as CFO this month, joining the Wilmington, N.C.-based bank from First Horizon Corp., a regional bank more than 10x as large. Also this month, Live Oak announced it had converted its depositors from a legacy core platform to Finxact, a fintech startup that is one of Live Oak's many investments. Live Oak has achieved national prominence through both prolific small-business lending programs and financial technology investments boosting the bottom line.

"There are several things that Live Oak is doing that I think are transformational and incredibly compelling when I think about where the future of banking is going," Losch said in an interview. "We are on a mission to be America's small-business bank."

Since its founding in 2008, the bank has produced solid returns, reporting a 3.01% return on average assets on an annualized basis in the most recent quarter, dominated niche businesses and developed a fintech named nCino, which went public in 2020 and boasts a $7 billion market cap. But it remains to be seen if the bank can revolutionize banking and achieve national prominence through small business lending.

Poaching Losch

As Live Oak looks to grow into national prominence, Losch's experience with much larger institutions — he worked at Wachovia prior to First Horizon — should become an asset for an already-deep management bench, said Chris Donat, an analyst with Piper Sandler who covers the bank.

"Certainly Live Oak has aspirations for their national presence, so someone with that kind of regional experience is helpful," Donat said.

Losch said Live Oak's strength in tech was a strong lure to the job. Live Oak has early-stage investments in several fintechs either directly or through its fund, Canapi Ventures, and CEO Chip Mahan sits on several boards. Some of the companies are headquartered on Live Oak's coastal campus.

Losch also secured a significant raise. Live Oak will pay the CFO an annual salary of $675,000 and 210,000 shares in the company that will vest over five years. With those shares currently valued at $11.6 million, Losch is set to earn about $3 million per year, compared to total compensation of about $2 million per year at First Horizon.

Most of the raise comes in the form of stock payments, and Live Oak's stock is one of the most expensive in the industry, trading at 3.85x tangible book value as of Sept. 20. That makes it one of only seven banks over 3x book and well above the 1.93x valuation for the S&P U.S. BMI Banks Index, according to S&P Global Market Intelligence data.

"I came here for many, many reasons, and all of those reasons I'm very comfortable and confident with," Losch said, calling the bank's profitability and high organic growth "foundational" to the current valuation and seeing tremendous upside in the bank's technology edge.

Equity analysts do not appear overly concerned with the bank's valuation. Most analysts have an "outperform" or similar rating on the stock, according to S&P Capital IQ. With a mean price target of $74 per share among five analysts covering the stock, analysts think the stock could appreciate 30% or more from today's expensive levels.

While the bank's fintech investments are core to its lofty valuation, its goal of small-business lending dominance will require old-fashioned banking, understanding the ins and outs of unique businesses so that the company can deliver a bespoke borrowing experience.

Live Oak is tackling this requirement by hiring industry-specific professionals and experts across dozens of verticals from veterinary to bioenergy. It is targeting small businesses as the sector is dominated by nonbank lenders with high funding costs due to large banks' reluctance to compete in the sector.

"[It's] an underserved market in small businesses because of their size and because other banks have trouble taking the time to understand those businesses," Piper Sandler's Donat said.

Still, the sector is not without risks. No bank has built a national small-business lending platform because underwriting can be inefficient and tricky, leaving plenty of room for error. Also, Live Oak could soon face a very large competitor in Citigroup Inc., which only recently launched an an online portal for small-business lending.

Finxact and friends

Operating a successful fintech investment fund on top of its traditional lending business provides multiple avenues to success. Fintech startups have exploded, and many of the companies target specific businesses — from wealth management to payment processing — that have long provided banks with reliable fee income. Meanwhile, the largest banks are only gaining market share while spending billions of dollars per year on tech. That has led many bankers to believe that the sector could be approaching a landscape of haves and have-nots. Under this theory, success in banking will be limited to small, bespoke community banks or giant, efficient national banks.

"I think that's right," Losch said. "I think those that will be successful can do a little of both: continue to garner efficiencies and participate in consolidation while also offering something that is differentiated, whether it's lines of business, technology solutions, geographic concentration, et cetera."

Live Oak's largest cash investment in a fintech is Finxact, and it is not a passive investment. Live Oak CEO Mahan serves on Finxact's board, and Live Oak this month converted its deposit customers to the core banking platform.

Core banking is dominated by a "big three": Fiserv, FIS and Jack Henry. Those legacy providers offer banks all the technology solutions they need to operate, from the client-facing applications to the back-office software lenders use to prospect for clients and originate loans. Live Oak's fintechs — and many of its fintech competitors — envision a future of banking that operates à la carte. Finxact solely tracks transactions and offers an interface that can easily incorporate new software through application programming interfaces, or APIs.

Finxact seeks to fulfill the promise of "open banking," a relatively new concept that enables third-party providers access to the banking core so that financial providers can easily customize the user experience. Live Oak offers APIs beyond Finxact's basic core. Apiture provides client-facing applications, Payrailz offers payment solutions, nCino enables commercial lending and back-office processes, DefenseStorm specializes in cybersecurity and the list goes on.

"We're building a deep, loyal customer base with what we're doing today, particularly on the lending side. But then you think about how we're embedding technology into their businesses over time," Losch said, mentioning the ability to push deposit, payments and technology solutions to their customers. "We add those on, and it just creates more and more client loyalty."

Still, the risk from such widespread fintech investments is divided management attention and a lack of focus that stymies potential. Apiture, for instance, experienced that at First Data before it was turned into a venture between First Data's new owners, Fiserv and Live Oak, said Chris Babcock, CEO of Apiture.

"First Data was a great company, but it does a lot more than digital banking," Babcock said. "And in a big company like that, some of the smaller operations get lost."

Live Oak and Finxact are also far from the only players in the open banking space.

Plaid, a San Francisco-based fintech, has built a technology platform that allows banks to connect third-party platforms to their existing core. Plaid agreed to sell to Visa Inc. for an eye-popping $5.3 billion deal price before regulators scuttled the deal over antitrust concerns.

Q2 and Alchemy are two other fintechs rushing to deliver on the promise of open banking, offering financial institutions the software code needed to seamlessly integrate new technologies. And several banks are touting their fintech capabilities, with companies such as Cross River Bank, New York Community Bancorp Inc., Customers Bancorp Inc. and Provident Bancorp Inc. touting "banking-as-a-service" solutions that aim to provide the banking infrastructure and regulatory compliance that fintechs need to launch their own products.

Live Oak thinks it can build a bank where all products from all customers are easily accessible through a seamless, efficient cloud-based platform, said Huntley Garriott, president of the bank. Live Oak is looking to build itself too. And Garriott said hiring Losch was fundamental to moving beyond a community bank.

"How do we grow and scale an organization? Think about balance sheet growth, investors, regulators, growing over $10 billion in assets, the bar continually just gets higher and higher," Garriott said. "Having [Losch's] level of experience, not only financially but strategically as well, is just going to be hugely helpful."